For many parents, seeing their children through college is a crucial part of the American Dream. After all, getting a college degree has become a minimum requirement for achieving a stable future. But every year, the price of college is racing upwards. A recent study by the College Board found that in the 2015–2016 academic year, a middle-of-the-road budget for attending an in-state, public college is $24,061. For a private college, you might be looking at a conservative budget of $47,831 for one year. This includes tuition, room and board, books and supplies, and travel and personal expenses.
It's a lot of money, and many parents make costly mistakes when it comes to paying for their children’s tuition. Before you run out and jeopardize your finances and your child’s financial future, let's take a look at the eight common mistakes that parents often make when it comes to paying for college.
1. Depending On Your 401(k)
If you are eyeballing your 401(k) as a potential method of payment, take a quick step back. Even borrowing money against the assets in your 401(k) can be a bad idea because that could make you ineligible for matching funds, depending on your company policies. So check the regulations and read the fine print. Similarly, if you get laid off or fired, you may have to pay all the money you borrowed back within a few short months. Relying on a 401(k) is not the smartest move when it comes to paying for college. You should also steer clear of taking a second mortgage on your house or picking up a poker habit in hopes of making a huge sum of money.
2. Waiting to Save
When you are holding a tiny newborn in your arms, it seems like you have plenty of time to start saving for her college education. Not so. Time flies, as they say, and before you know it you could have a 15-year old who dreams of attending Harvard (average tuition about $45,278 a year) or Yale ($49,480 per year). And those numbers do not include necessary expenses like room and board, books, extra fees and transportation. Start saving immediately. Open a 529 college savings plan, which is an account that offers tax benefits and interest for college savings. The benefits and particulars of the 529 account will vary from state to state. According to student loan lender Sallie Mae, fewer than half of all parents are saving up for their kids to attend college. Do not be one of those parents. Start saving immediately, even if it is just a small amount per paycheck. If you get work bonuses over the years, put them straight into the college account instead of splurging on new purchases. You (and your child) will be much better off in the long run.
3. Closing Your 529 Account too Soon
So you opened a 529 account early and started saving right away. Nice work! One mistake many parents make, though, is closing the 529 account as soon as their child starts college. Instead, keep depositing money while they are in school so you can keep earning tax-free interest. Plus, you don’t know what kind of surprise costs might pop up when your child is in school – expenses like lab fees, extra books, a year abroad or unexpected tuition hikes. Be prepared.
4. Counting on a Full Scholarship
Your child might be the valedictorian and an all-star athlete, but earning a full-ride merit scholarship is about as common as winning the lotto. Okay, maybe the odds aren’t quite as slim, but it is still very rare. Do not bank on your kid being one of the few who earn a full ride. If they do, that’s amazing and congratulations. But start saving and plan for the worst-case scenario just in case. You can always pop the champagne bottle when they do get that full ride.
5. Only Looking at the Ivy League
Many parents make the mistake of pushing their kids to only aim for Ivy League schools. It’s important to teach kids to strive for the best, but the high cost of tuition and living at Ivies might not be the best option for your child. There are plenty of incredible schools that are much less expensive, so keep an open mind and apply to schools with varying costs.
6. Not Researching Loans
In the United States alone, there is currently $1.3 trillion in outstanding student loan debt. The size of student loans have ballooned over the last few years. You would not invest in stocks without doing your homework and researching them in-depth, so don’t let your kids take out loans on a whim without looking at the fine print. It could save you and your child a lot of financial headaches in the future.
7. Cosigning For Loans
It might be tempting to cosign for your kid’s student loans, since it can often help them get a lower interest rates or better terms. Many parents who have done this find themselves saddled with debt because they cosigned on loans without weighing the consequences. There is no forgiveness when it comes to student loans. If your child cannot of will not repay his loans once he or she graduates, the monthly payments will fall on your shoulders. This could jeopardize your financial future. Be cautious before cosigning on a loan.
8. Staying Silent
The class of 2016 is the most indebted group of graduates in history. Each graduate carries an average of $37,172 in loans, an increase of 6% from last year. Many parents don’t talk to their kids about finances, loans and tuition. Sit down with your kids when they are still in high school and tell them about your finances. Communicate openly and honestly about what the future holds. One of the costliest mistakes is to stay silent.
The Bottom Line
College tuition in the Unites States is at an all-time high, and student loan debt is a national issue. Many parents make mistakes when it comes to saving for college tuition, so remember to start saving early, do your research and talk to your kids. Overall, be realistic about goals, priorities and finances.